Keeping child benefit by making pension contributions

ibexward

Hi, I'm trying to work out how much you need to pay into your pension to avoid having to pay back child benefit. If someone has an adjusted net income of £60,000 and gets £3146 a year in child benefit for 4 children, my understanding is that they would lose 100% of the child benefit from 7th January. To avoid losing it, they can pay £10,000 into a pension scheme, to reduce their income to £50,000. However, am I right in saying that doing this would result in a £2000 tax rebate as they are a higher rate tax payer? If that is the case, can they not pay less into the pension and offset their tax rebate against the tax charge on the child benefit? For example, paying £5000 into the pension would mean a £1000 tax rebate and a 50% child benefit tax charge of £1573 - a bill of £573 overall? Is this right or am I missing something? Thanks, Rebecca

Just realised there is already a thread about this - still not clear what the implications are if it is payed via a salary sacrifice scheme ?

ceeforcat

Nearly there - you pay £8000 into the pension scheme which is deemed a £10000 contribution with tax relief automatically obtained.

In addition, you claim a further £2000 from HMRC because you pay tax at higher rates and are entitled to claim at 40% relief.

You have a net contribution therefore of £6000 and, for that, have restored child benefit of £3146 and obtained additional pension contributions of £4000 - not bad at all!

Toki

Hope you don't mind me asking a question on this thread rather than starting a new one. I am also looking to make a payment into a SIPP to avoid losing out on child benefit.

When would I have to make the payment by? The end of this tax year or by January?

Thanks in advance.

ceeforcat

Toki wrote: »

Hope you don't mind me asking a question on this thread rather than starting a new one. I am also looking to make a payment into a SIPP to avoid losing out on child benefit.

When would I have to make the payment by? The end of this tax year or by January?

Thanks in advance.

By 5th April 2013.

JWSM

So I understand that entitlement to child benefit is based on "adjusted net income" (ANI).

So to use an example, if my current ANI is £51,000. I will 'lose' 10% of child benefit unless I reduce my ANI to £50,000 or less. So I decide to pay £1,000 into a personal pension to reduce my ANI to £50,000 and therefore keep all of my child benefit.

Has anyone else paid (or is looking to pay) pension contributions in the 2012/13 tax year to avoid 'losing' child benefit? If so grateful for your help with the following two questions:

1) being a higher rate tax payer, do I only need to pay £800 to the personal pension plan (PPP) - the PPP provider will receive £200 from the government in respect of tax relief and I can claim an additional £200 from HMRC. Does it make any difference if the £200 I reclaim is actually paid in a different tax year to the year I am looking to reduce my ANI to £50,000 ie the £200 is reclaimed in the 2013/14 tax year from HMRC but is payable based on pension contributions paid in the 2012/13 tax year?

2) I understand that the potential reduction to child benefit is for child benefit paid from 6 January 2013. Therefore for the 2012/13 tax year I can only save two months of part of the child benefit by reducing the ANI to £50,000. So is the child benefit for 2012/13 based on the ANI for the 2012/13 tax year? I would have thought so in which case the advantage of paying extra pension contributions in the 2012/13 tax year is only 1/6th the value of paying extra pension contributions in the 2013/14 tax year (because for 2013/14 the contributions would 'save' the child benefit for the whole year rather than just the two months).

Thanks for your help.

zagfles

JWSM wrote: »

So I understand that entitlement to child benefit is based on "adjusted net income" (ANI).

So to use an example, if my current ANI is £51,000. I will 'lose' 10% of child benefit unless I reduce my ANI to £50,000 or less. So I decide to pay £1,000 into a personal pension to reduce my ANI to £50,000 and therefore keep all of my child benefit.

Has anyone else paid (or is looking to pay) pension contributions in the 2012/13 tax year to avoid 'losing' child benefit? If so grateful for your help with the following two questions:

1) being a higher rate tax payer, do I only need to pay £800 to the personal pension plan (PPP) - the PPP provider will receive £200 from the government in respect of tax relief and I can claim an additional £200 from HMRC.

Yes

Does it make any difference if the £200 I reclaim is actually paid in a different tax year to the year I am looking to reduce my ANI to £50,000 ie the £200 is reclaimed in the 2013/14 tax year from HMRC but is payable based on pension contributions paid in the 2012/13 tax year?

It doesn't matter that the relief won't be paid till next tax year, it'll still all counts as this year's contribution.

2) I understand that the potential reduction to child benefit is for child benefit paid from 6 January 2013. Therefore for the 2012/13 tax year I can only save two months of part of the child benefit by reducing the ANI to £50,000. So is the child benefit for 2012/13 based on the ANI for the 2012/13 tax year? I would have thought so in which case the advantage of paying extra pension contributions in the 2012/13 tax year is only 1/6th the value of paying extra pension contributions in the 2013/14 tax year (because for 2013/14 the contributions would 'save' the child benefit for the whole year rather than just the two months).

Thanks for your help.

Yes, except it's almost 3 months ie 7 Jan-5Apr

JWSM

Thanks - so confirms what I thought ie best bang for buck is to start making additional pension contributions in the 2013/14 year (whilst keeping an eye on the annual allowance and in future years for me anyway the lifetime allowance).

Ironically this means that the government will get less tax from me albeit (as things stand) 75% of the additional pension fund will be taxed when I retire - but will still pay my wife the child benefit.

And thanks for pointing out the fact I can't count to three months - brain obviously gave out at the end!

System

Toki wrote: »

Hope you don't mind me asking a question on this thread rather than starting a new one. I am also looking to make a payment into a SIPP to avoid losing out on child benefit.

When would I have to make the payment by? The end of this tax year or by January?
.

Just be aware that I think a pension year has a different definition from a tax year. For a pension contribution to be valid it has to be valid within the pension year in question, ie not exceeding your maximum permitted contribution level for that year.

zagfles

Clifford_Pope wrote: »

Just be aware that I think a pension year has a different definition from a tax year. For a pension contribution to be valid it has to be valid within the pension year in question, ie not exceeding your maximum permitted contribution level for that year.

I think most personal scheme align the "pension input period" to the tax year, but best to check with them. The contribution would count for tax purposes in the year it's made, the pension input amount/period is only relevant for the annual allowance calculation (the annual allowance is £50,000, until April 2014 when it goes down to £40,000).

See http://www.scottishlife.co.uk/scotlife/web/site/Adviser/TechnicalCentralArea/Informationguidance/Monthlyroundup/Pension_input_periods_and_pension_input_amounts.asp

JWSM

I'm fortunate to be in a defined benefit scheme - the PIP for that is 1 Jan to 31 Dec.

Fingers crossed that the annual allowance / lifetime allowance start to increase again after a few years because with the effects of inflation the tax efficient pension thresholds will start to impact more and more people. Apparently the reduction of the LTA to £1.25m in 2014 is going to impact c. 360,000 people:

www. hmrc.gov.uk/budget2013/tiin-1046.pdf

JWSM

had to leave a gap in the link as i cannot post links as a 'newbee'!